Greece may make an exit from Euro: Economist

MUMBAI: Although the debt crisis in Europe is temporarily defused, there is a possibility of Greece making an exit from Euro, a leading economist said here today.

Speaking at 14th Annual Conference on Money and Finance organised by Indira Gandhi Institute of Development Research here, Michael Bordo, Director, Centre for Monetary and Financial History at Rutgers University said, "The Euro area is still struggling. The Greek crisis may be temporarily on hold with structured default that has been concluded. (But) forced austerity in that country and a political backlash may end in a real disorderly default in the not too distant future and a possible exit from the euro."

Portugal may follow with a structured default, Bordo warned and said that the crisis for the rest of the euro area was being temporarily alleviated by generous ECB liquidity to the banks, some bank recapitalisation and moving toward moderate structural reforms.

The Deputy governor of Reserve Bank of India Subir Gokarn in his speech emphasised on the need for fiscal prudence at both the state and the national level and observed that presently the market perceives that the state debt is backed by the sovereign.

"The debt of the state governments is implicitly guaranteed by the sovereign. So with or without a formal guarantee, market perceives that state debt has been fully backed by sovereign. States with weak fiscal consolidation don't pay much premium compared to states with strong fiscal conditions," he said.

The important thing in this year's budget is the commitment to return to rule-based approach. The current macro-economy is much threatened by fiscal expansion, Gokarn said.